Only a matter of time before ECB is forced into massive quantitative easing

The European Central Bank will have to act again if it wants to save the euro

If I read my Twitter feed correctly, Jorg Asmussen, the German representative on the European Central Bank's executive board, thinks that the ECB has already played its part as far as saving the euro is concerned with last December's LTRO intervention; it's now up to national governments to complete the process, he says, by undertaking the necessary structural reform (Mr Asmussen has been speaking at the Institute for New Economic Thinking conference in Berlin).

As is becoming ever more common when it comes to euroland, it's a view which is quite at odds with the facts. True enough, the ECB's surprise liquidity operation did succeed in dousing the crisis, at least temporarily. A Lehman's style meltdown was averted. But the idea that the ECB can now sit back and let the politicians do the rest is surely deluded.

Despite the ECB's actions, the big southern European countries – Italy and Spain – are slumping back into recession, casting doubt on their ability to meet fiscal targets, reigniting the banking crisis and undermining political support for structural reform. Mr Asmussen's solution to this problem appears to be more of the same, or more austerity and more structural reform.

The structural reform bit, I would go along with. All advanced economies need urgently to improve their competitiveness. Labour protections need to be swept away, and entitlement systems put on a sustainable basis. But it is plain as a pike staff that repeated rounds of immediately imposed austerity are making matters worse, not better. Once again, the eurozone is in danger of falling apart. The idea that this can be addressed simply by imposing more pain is unrealistic and wrong headed. These countries need growth, otherwise they stand no chance of putting their public finances in order and very little chance of becoming competitive again.

Since fiscal expansionism is out of the question, the only possible hope for salvation – within the euro that is – lies with the ECB. It may require the whole of the eurozone to move seriously into recession before the ECB acts, but eventually it will surely have to follow the US Federal Reserve and the Bank of England into full scale quantitative easing.

To do this in a way which removes the charge of monetising deficits, the ECB would have to enact a broadly based bond purchasing programme across the entire eurozone, buying up national sovereign debt in proportion to the sponsoring country's share of GDP. Naturally, that would mean the heaviest purchases would have to take place in Germany.

To the Bundesbank, it would be anathema. Already the Bundesbank thinks policy in the eurozone far too loose. To Germans, even 5pc house price inflation, which is roughly what they've got at the moment, looks like a bubble, and there have been a number of inflation busting pay awards of late, not least in the public sector. Despairing of action by the ECB to choke off inflationary pressures, the Bundesbank has hinted at nationally imposed credit controls to dampen things down.

Yet if there is ever to be any way out of this mess for the eurozone as a whole, other than break-up, a German boom is just the ticket. If there is relatively high inflation in Germany, it reduces the size of the deflation needed in the periphery to return to competitiveness. For the good of the whole, it's right that the ECB should be inducing a boom in Germany.

Germany, of course, doesn't see it this way. But then the eurozone isn't just Germany. Monetary policy has to be run for the benefit of Europe in aggregate, not just the Rhineland and her dominions. European solidarity is about to suffer its biggest test yet. A battle royal is promised over the months ahead, as these rival calls on monetary policy fight it out. One size never did fit all, and now it's again busting apart at the seams.